Decentralised finance services that aren’t compliant with anti-money laundering and terrorist financing rules pose “the most significant current illicit finance risk” in that corner of the crypto sector, according to the U.S. Department of the Treasury’s first analysis of hazards from the technology.
Decentralised finance offers financial instruments by using smart contracts on blockchain technology. In an expected risk assessment, published Thursday, the Treasury Department said thieves, scammers, ransomware cyber criminals and actors for the Democratic People’s Republic of Korea (DPRK) are using DeFi to launder proceeds from crime.
On the basis of its findings, the department recommends an assessment of “possible enhancements” to U.S. anti-money laundering (AML) requirements and the rules for countering the financing of terrorism (CFT) as they should be applied to DeFi services. It also calls for input from the private sector to inform the next steps.
“Clearly, we can’t do this alone,” said Brian Nelson, Treasury’s undersecretary for terrorism and financial intelligence, in a Thursday webcast hosted by ACAMS, a global organisation focused on preventing financial crime.
“We call on the private sector to use the findings of the risk assessment to inform your own risk-mitigation strategies,” he added.
The 40-page report warns that DeFi services at present often do not implement AML/CFT controls or other processes to identify customers, allowing layering of proceeds to take place instantaneously and pseudonymously.
“When these entities fail to register with the appropriate regulator, fail to establish and maintain sufficient AML/CFT controls or do not comply with sanctions obligations, criminals are more likely to exploit their services successfully, including to circumvent U.S. and [United Nations] sanctions,” said the report.
The assessment furthers the work outlined in President Joe Biden’s executive order on crypto from last year, and Nelson said it is the first of its kind in the world. Other jurisdictions including the European Union have also started looking at tackling money laundering risks associated with DeFi.
Nelson noted that DeFi can often pose challenges in trying to figure out the individuals behind the business activities. But he pointed out it does not matter whether the services are centralised or decentralised when figuring out whether they were covered by the Bank Secrecy Act.
He said even those that claim full decentralisation can really engage in a wide range of activity that falls somewhere closer to traditional finance than they were suggesting.
“In some ways they’re really decentralised in name only,” he said.
